THE BEST BET FOR TAX SAVING DEVICES ARE ELSS & PPF

This is the time for Tax Saving device. The most employees look for the best tax saving devices during the month of February. In corporate houses employees need to submit their tax savings options to the account department who in turn calculate the tax liabilities of staff, workers and executives for proper deduction tax from their income. As February approached I started receiving calls from the readers of our column as to what would be the best tax saving devices during this fiscal. It is a genuine query and needs to be addressed dispassionately.

The total limit of tax exemption under section 80 c is Rs. one Lakh only per annum. All the employees would get the benefit of provident fund deduction from its employers. After receiving the benefit from Provident fund the gap shall have to be filled up by subscribing to other tax saving devices. The tax saving devices include, among others, PPF, Life insurance, ELSS, NSC certificate, ULIP, Senior citizen’s fund, bank fixed deposit and post office FD.

My personal preferences are Insurance and PPF. But here is a catch. Both Insurances and PPF do not really suit senior citizens. I have advised some of my senior citizen friends to subscribe to Bank’s fixed deposit or in SCSS for five years to avail the benefit of 80 C benefits. Some of my friends are holding PPF even after expiry of mandatory 15 years period. These friends were advised to put their money, for 80 c benefit, in PPF account only. However only RS. 70,000 can be kept in PPF. Then where to keep the balance amount of Rs 30,000 to enable them to avail full tax benefit? For senior citizen best bet is to keep the money in bank’s FD or SCSS for five years, in case he has no PPF account.

NSC is good but investors have to pay tax on interest unlike PF, PPF and ULIP. So it emerged that the persons who have existing PPF account they can put the money there. It would help them greatly for there would be no tax on interest and in case they need money in emergency they can take it out too, after completing seventh year.

I asked a few young friends as to why they did not like to put money in ELSS? They replied the stock market has crashed and they felt that was not the time to buy ELSS. I explained to them that the best time to buy ELSS was now, because the market has crashed and the NAV (at which price they would be able to buy) is the lowest. A few economists friend of mine calculated the compounded annual growth returns (CAGR) of both ELSS and Fixed Income instrument. It was found that in a period of five years compared to fixed income instrument ELSS have given better returns in spite of the great financial downturn. One of my intimate friends subscribed to ELSS in 2003. He confirmed that he is still in profit despite the fact that Share market came down to 8900(Sensex) from 21000. Yes, his investment in 2003 is still in profit... The share market never remains dormant for a very long term. The world had seen worst financial disaster in 1932 yet it had survived the depression. The financial mayhem has brought in recession surely but it is nothing compared to experiences of the great depression. American people did not even have enough to eat then. The situation is bad even now but is expected to improve by 2012.

It would be worth mentioning that the return of last five years in ELSS is much better than fixed income instrument. Magnum Tax gain’s return is 27.25% and Sundaram Tax gain’s return is 22.59%. HDFC Tax saver gave 20.56% return. Whereas the highest return in fixed income instrument like Bank FD & Senior citizen scheme gave 9.31%& PPF and NSC gave around 8.16%. Younger employees do not need to be afraid of. To me ELSS is the best Tax saving instrument for younger investors. For senior citizen, Bank FD, SCSS would be better if no valid PPF account is available.

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